Applied Materials (AMAT +3.72%) posted its latest earnings report on Nov. 16. For the fourth quarter of fiscal 2023, which ended on Oct. 29, the semiconductor equipment maker's revenue stayed nearly flat year over year at $6.7 billion but exceeded analysts' expectations by $220 million. Its adjusted earnings grew 4% to $2.12 per share and also cleared the consensus forecast by $0.13.
Those numbers seemed stable, but they were overshadowed by a report that the U.S. Department of Justice (DOJ) had launched a criminal probe into its unapproved exports of "hundreds of millions" of dollars in equipment to the Chinese chipmaking giant Semiconductor Manufacturing International Corp. (SMIC). Applied Materials allegedly evaded the new export controls, which went into effect last October, by shipping its products to China through a subsidiary in South Korea.
Image source: Getty Images.
Applied Materials' stock tumbled 4% in response to the news, but it's still risen more than 40% over the past 12 months in anticipation of the semiconductor market's cyclical recovery. Should investors consider this post-earnings pullback to be a buying opportunity? Let's see where this stock might be headed in a year.
NASDAQ: AMAT
Key Data Points
Is Applied Materials' cyclical slowdown over?
Applied Materials is one of the world's largest suppliers of semiconductor manufacturing equipment. In fiscal 2023, the company generated 74% of its revenue from its semiconductor systems segment, which produces a wide range of manufacturing equipment for the foundry, logic, and memory chip markets.
Another 22% of its revenue came from its applied global services segment, which installs and maintains that hardware. The remaining 3% came from its display and adjacent markets business, primarily selling equipment for LCD and OLED screens. Here's how those three businesses fared over the past year.
|
Metric |
Q4 2022 |
Q1 2023 |
Q2 2023 |
Q3 2023 |
Q4 2023 |
|---|---|---|---|---|---|
|
Semiconductor systems revenue growth (YOY) |
17% |
13% |
12% |
(1%) |
(3%) |
|
Applied global services revenue growth (YOY) |
4% |
4% |
3% |
3% |
4% |
|
Display and adjacent markets revenue growth (YOY) |
(40%) |
(54%) |
(56%) |
(29%) |
19% |
|
Total revenue growth (YOY) |
10% |
7% |
6% |
(1%) |
0% |
Data source: Applied Materials. YOY = year over year.
Applied Materials' semiconductor equipment sales decelerated significantly as the broader chipmaking market cooled off. That slowdown was mainly caused by slower post-pandemic sales of new PCs, the end of the 5G upgrade cycle in smartphones, and persistent macro headwinds for both consumer and enterprise spending.
It expects that slowdown to drag on with a 4% year-over-year revenue decline in the first quarter of fiscal 2024 as its adjusted earnings per share (EPS) dips about 6%. However, both of those midpoint forecasts exceeded analysts' expectations.
Applied Materials hasn't reached its cyclical trough yet, but it expects its strengths to offset a lot of its weaknesses in 2024. During the conference call, CEO Gary Dickerson predicted the growth of the PC, cloud, and artificial intelligence (AI) data center markets would offset the softness of the industrial automation and automotive markets over the coming year -- even as it remained "mindful of the complex macroeconomic and geopolitical environment."
Its margins are stabilizing
Applied Materials' near-term revenue growth should remain sluggish, but its margins are stable. Its gross margin rose both sequentially and year over year in the fourth quarter as its higher prices and better cost controls offset the inflationary headwinds. Its operating margin dipped year over year as it ramped up its research and development spending, but it still rose sequentially.
|
Metric |
Q4 2022 |
Q1 2023 |
Q2 2023 |
Q3 2023 |
Q4 2023 |
|---|---|---|---|---|---|
|
Adjusted gross margin |
46% |
46.8% |
46.8% |
46.4% |
47.3% |
|
Adjusted operating margin |
29.8% |
29.5% |
29.1% |
28.3% |
29.5% |
Data source: Applied Materials.
For the full year, analysts expect Applied Materials' revenue and adjusted EPS to decline by 1% and 3%. But in fiscal 2025, they expect its revenue and adjusted EPS to grow 9% and 15%, respectively, as the semiconductor market recovers.
But what about the DOJ investigation?
Applied Materials' stock looks reasonably valued at 18 times forward earnings. It also pays a forward dividend yield of 0.8%. By comparison, the Dutch semiconductor equipment maker ASML, which is growing faster thanks to its dominance of the lithography market, trades at 32 times forward earnings. Lam Research, which faces many of the same challenges as Applied Materials, trades at 24 times forward earnings.
However, Applied Materials' stock could become even cheaper if the DOJ steps in and shuts down its business in China, which drove most of its equipment sales in the fourth quarter and accounted for 27% of its full-year revenue. It could also be hit with additional fines and trade restrictions.
Where will Applied Materials' stock be in a year?
Applied Materials' growth won't accelerate anytime soon, but the DOJ investigation will continue to cast dark clouds over its Chinese business. Its heavy exposure to the macro-sensitive industrial sector could also throttle its near-term growth.
Therefore, I believe it will struggle to stay ahead of the market and most of its industry peers over the next 12 months. It might bounce back over the long term, but I'd rather stick with higher-growth players like ASML in this challenging market.
